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If your startup company is in a dispute, you may have received a letter of demand. Knowing how to deal with a letter of demand and disputes more generally is a very important aspect of effectively running a business. This is especially true if you run a startup company, as your liquidity and cash flow are more sensitive. This article will explain how to deal with a letter of demand in the context of an early-stage business.
What is a Letter of Demand?
A letter of demand (sometimes called a statutory demand) is a letter that sets out a creditor’s intention to initiate formal legal proceedings against a debtor. This usually involves a creditor taking a debtor to court. Statutory demands can lead to insolvency proceedings if you do not respond to one in adequate time or make an application to postpone a court hearing. As a result, a creditor will often use a letter of demand as a threat of potential legal action if they do not receive their money within adequate time.
Responding to a Letter of Demand
Responding to the letter of demand is vitally important. Most letters of demand require you to respond to the letter within a set time period – usually less than a month. The other party can initiate legal proceedings if you completely ignore the statutory demand.
Being the subject of legal proceedings can hurt your business, especially in its early stages. Not only will you have to pay the costs of a lawyer and court fees, which be well into the thousands of pounds, but the court may also impose a costs order. This involves paying the other party’s legal fees on top of what you already owe them.
This can grind your business activity and operations to a halt and can hurt your overall finances. If you encounter cash flow problems in the future while dealing with a dispute, then you can find yourself in a very tricky situation.
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What are My Options if I Receive a Letter of Demand?
The first thing to do upon receiving a letter of demand is to contact the creditor. A letter of demand will only be valid if the debt exceeds £750 if it is served to a company. Further, a creditor will usually try to talk to you in a more informal way before using statutory demands. If they have not done so, it is a good idea to reach out and see if there is an alternative way of reaching a mutual resolution. If you have contacted the creditor and they are not cooperating and are pushing with the letter of demand, you still have some options available.
The first thing to do is consider how you may be able to pay off the debt. You might be able to, for example, restructure the debt with the creditor. This way, you can make the debt payments over a longer period. A creditor may accept this, as it makes it more likely for you to be able to pay your debts.
What If I Cannot Pay Off the Debts?
You still have some options if you cannot pay off your debts. One thing you can do is to apply to restrain the creditor from presenting a winding-up petition. A winding-up petition is how formal insolvency proceedings begin.
In insolvency proceedings, your business will be made to liquidate its assets to pay off the debt. In other words, you will have to sell off parts of your business to facilitate your debt obligations. Avoiding insolvency proceedings is important to keep your business operating. If you are made insolvent, it is often difficult to recover your business back to the position it was in before. As a result, it is a good idea to look at restraining the creditor from using a winding-up petition.
Key Takeaways
If you are running a startup company, you may find that you receive a letter of demand. This is when a creditor is asking for your money back and is backing up their demand with the threat of legal action. You must understand exactly what your debts are to the other party and all of the options available to you in paying the debt back. The first thing to do is to check the demand’s validity.
If the demand is valid, then a good way of navigating this type of issue is to restructure your debt to the other party if you cannot pay it back. This is preferable to insolvency proceedings, as getting your business operational after becoming insolvent is very difficult.
If you have any questions or have received a letter of demand, our experienced dispute lawyers can as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Letters of demand, sometimes known as statutory demands, are when a creditor asks for the money back in a formal letter. This is usually backed up by a threat of starting legal proceedings in court.
Insolvency is when your business sells off its assets to repay the debt that it owes to its creditors.
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